Tag Archives: recession

Summary: Today we take another look at the US economy. The indicators paint a clear picture of an economy slowing, vulnerable to recession, in a strange space. A recession could become ugly; don’t expect a return to normality. Overall it’s a boring picture, hence its widespread misrepresentation in the investment media as either wonderful or bleak (they give us the news we want). {1st of 2 posts today.}

Contents

The big trends

My favorite indicator, a window onto the world

Waiting for the return to normalcy

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(1) The Big Trends

The bears say that we’re in a recession. But then they so often say that, at least since the crash. Let’s look at the data. The picture shows bad news — for those earning their bread by telling you lurid stories about the economy. Let’s look at a typical graph: the percent change year-over-year in non-farm jobs, not seasonally adjusted (not needed, since we’re using YoY numbers). It shows boring slow growth. The opposite of clickbait.

The number of jobs provides too narrow a window on the labor market to tell us much. For a wider view we can turn to the Fed’s Labor Market Conditions Index, combining 19 indicators in a complex model. An exciting reading of -2, until you realize that zero is the average. It shows slowing — as many indicators do now, but the data doesn’t justify the Zero Hedge headlines saying that we’re in recession.

Summary: This week’s economic status report looks at the remarkable stability of the US economy since the crash, despite repeated slowdowns. Like the one that began in the first quarter. The second half might bring the long-awaited good news, or a recession. Boom or bust, either one will tell us much about the new economic regime that began at the turn of the century. {1st of 2 posts today.}

The amazing aspect of the post-crash US economy is not the crashes so often predicted by the bears (which never arrived). It’s not the booms so often predicted by the bulls (which never arrived). It’s the stability of the slow but steady economic growth during the past 5 years — ranging from 1.2% to 3.1% (YoY real GDP, SA). The large quarter to quarter swings are fodder for economists’ excited predictions, but so far inertia rules.

YoY: year over year comparison. SA: seasonally adjusted. SAAR: SA at annualized rate.

This stability is deceptive, as economic data so often is. The periods of slow growth, with high risk of becoming recessions, were met by fiscal or monetary stimulus. The boomlets faded away for various causes. While it looks like stability, it was actually a series of unfortunate events plus active economic management by the government.

Here we are again

Q1 real GDP was almost zero (0.2% SAAR). That’s ugly, especially since the consensus forecast was 3.2% a year ago and 1% the day before (although the forecast by the Atlanta Fed’s GDPnow model was spot-on at 0.1% — raising the prospect of mass unemployment of economists as models improve). Worse, Q1 GDP was boosted by a large inventory build (GDP measures production, not sales). GDP less that inventory build was -0.5% SAAR. Those stockpiles will depress Q2 growth. Not to worry, since most economists are excited about the second half of the year (as always).

Summary: Today we have another briefing on the US economy and stock market. The situation grows darker, cliffs might lie ahead, but it’s still too soon to say more than that. Read on to learn the details. {1st of 2 posts today.}

This is a new economic regime, profoundly different than the post-WWII era. Many of the relationships we used to navigate by have changed, as things considered extraordinary have become normal (e.g., long periods of zero interest rates and even negative rates). Yet there are warning signs with a long history of accuracy.

Don’t be comforted by economists’ optimism; many studies have shown their unreliability (especially their inability to foresee recessions). Listen instead to the 30 central banks that have cut interest rates this year, showing their true view of the situation.

For clear advice I recommend reading Albert Edwards of Société Générale, among the most insightful of investment strategists. In this from his 12 February report he gives the essential facts about our situation:

The market seems pretty convinced that the Fed will tighten in the middle of this year and maybe it will. Certainly the labour market is tighter and the Fed tells us that the recovery is well established. But, the Fed always spins a bullish yarn. Their track record of over-optimism is only surpassed by the appalling record of private sector forecasters – most especially in forecasting recessions. A rate hike this year when deflation pressures are intensifying could go down as big a policy cock-up as the BoJ raising VAT {valued-added taxes} in 1997, triggering recession, or the ECB tightening rates in July 2008 when the global recession was already well underway!

His report on 26 February updates that with the missing part of the equation: bad news. US economic data has grown worse since he wrote this.

Summary: These economic status reports grow more interesting as the data shows slowing while the stock market bubbles. It’s nothing like 2007, except in our blindness to events and disinterest in preparing for obvious risks. When the recession arrives (we can’t know when), I believe it will mark the start of a new economic order. The next generation will listen with astonishment to tales of these days. {2nd of 2 posts today.}

“In a nutshell: Things are looking better — in fact, they’re looking downright good. The economy is showing solid momentum and there’s good news in virtually every sector. I expect U.S. growth to be about 2½% in real GDP. I see the continued improvements in the economy pushing wages and prices up, and inflation moving back toward its target. I expect to reach full employment by the end of the year.”

Contents

(1) One of the big indicators: new orders for durable goods

The February numbers were weak, as they have been so often during this long slow expansion. The big picture is that they have been flat during the past 2 years (easily missed if you read the news by the hyperventilating over the little swings). They’re the same level as September 2006, and 5% below the pre-crash peak of December 2007. Almost unchanged from a year ago, any breakdown from here will warn of an imminent recession.

Summary: The economic data continues to darken. Let’s review the situation — updating the recession watch — and guessing what might be the government’s response to a recession. It’s an era of new normals, so we should expect steps that would have been considered incredible or even mad a decade or two ago. {1st of 2 posts today.}

“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
— Dorothy in “The Wizard of Oz”.

Contents

The bad news

Worse news

The weak data

What comes next?

For More Information

Perhaps a better world lies ahead

(1) The bad news

The graph below gives an ugly forecast. But let’s keep this in context, especially now that the doomsters have discovered it. The value of the Atlanta Fed’s GDPnow forecast is its immediacy. They explain that it’s no more accurate than forecasts by economists or other models. Which is to say it’s a best guess made with limited information. Also, the Fed remains hopeful that Q1 is an aberration, so that 2015 has growth of 2.3% – 2.7%.

Summary: How close is the US economy to a recession? Here we review the evidence and draw a firm conclusion. {1st of 2 posts today.}

The financial press overflows with confident forecasts about everything from individual stock prices to the fate of the overall economy. It’s usually difficult to reliably predict such things with useful accuracy; since the crash it’s become far more so. My prediction each year since 2010 has been for slow growth (in the low 2%’s); that’s proven correct. Let’s try for something more ambitious.

Contents

How close are we to a recession?

The Econbrowser Recession Indicator Index.

Looking at Q1 GDP.

How fast can GDP fall?

The current numbers: how are we doing?

Conclusions

For More Information

(1) How close are we to a recession?

Let’s start with the big picture and move to the details. GDP was moderately strong in Q3 and Q4 at aprox 2.6%. Economists expect a strong economy (as usual). Looks good.

But before examining the data, we need some context. Surveys of consensus opinion of economists have never predicted a recession (correctly or incorrectly). So their sunny forecasts tell us little.

Second, the economy has experienced unprecedented distortion from six years of fiscal and monetary stimulus — including maintaining the short-term risk-less interest rate at zero, long-term government bond yields below the inflation rate (aka negative real rates), plus three rounds of quantitative easing. These have made many of the usual forecasting tools less effective.

(2) The Econbrowser Recession Indicator Index.

For useful perspective see a tool developed by James Hamilton, Professor of Economics at UC-San Diego. His Econbrowser Recession Indicator Index is an indicator of contemporaneous data — its quarterly indexes are not changed as data is revised. See his article describing it. It now reads 1.6% — low odds of a recession, slowly falling.

Summary: Brad Delong (Prof Economics, Berkeley) reminds us that on this day in 1914 the NYSE ended the longest period of stopped trading. The outbreak of war on 31 July triggered “the longest circuit breaker” in NYSE history. His post, as usual, gives an interesting account of that episode. Who closed the NYSE, and why? There is another lesson from this history, one of importance to us today. (This is the second of 2 posts today)

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“Unless you expect the unexpected you will never find truth, for it is difficult to discover.”

— Heraclitus, the pre-Socratic “Weeping Philosopher” of Ionia

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Stock market strategists and economists often tell us about markets’ fantastic predictive ability (an emergent phenomenon from millions of investors), often to the extent of referring to stock prices as a barometer of economic health. Count me among the skeptics when it comes to forecasting.

Here’s a survey of risks by Nial Ferguson (Prof History, Harvard), typical of those before the 2008 crash. He doesn’t even mention the structural weakness of banks, the factor converting a real estate downturn into a global crash. But then nobody saw this (that I’ve found).

Even in what investors should see best — economic cycles — their record is mixed. Sometimes the market gets it wrong; the October 1987 crash predicted nothing. Sometimes the market sees things a little late: the Great Depression began as the US economic downturn began in August 1929; the stock market crashed on October 29 (timeline here). Sometimes the market gets it right: the stock market peaked on 9 October 2007, the recession began in December, the economy crashed in Fall 2008 (timeline here).

Geopolitics have an immense effect on markets. Here economists have very poor record of forecasting, although they often see themselves as bookies of geopolitics (they tend to be hawks, which is odd given the horrific history of war’s effects). Likewise, investors poorly assess geopolitical threats. On this 100th anniversary of WWI let’s see how well investors anticipated that climatic event (timeline here).

In hindsight WWI looks almost inevitable. Historians see its origin in two decades of rising geopolitical tensions among the major western powers as William Lind explains. Yet investors back then didn’t feel rising tension. For a scholarly yet readable account I recommend Nial Ferguson’s “Earning from History? Financial Markets and the Approach of World Wars” (Brookings, Spring 2008), which provides the quotes below. An assassin killed the Archduke Franz Ferdinand of Austria on June 28. In the following month stock prices declined throughout the western world. Prices of US railroad and industrial shares dropped 15%. The Vienna stock market crashed on July 13.

Although selling spread of stocks and intensified, investors in most assets in the so-far unaffected nations remained calm (the bond markets dwarf stocks in size). Similar crisis had been resolved through diplomacy. Europe had not experienced widespread war for a century. Compelling analysis by experts such as Jan Gotlib Bloch (Is War Now Impossible?) and Norman Angell (The Great Illusion) proved war to be irrational and hence unlikely.